Alibaba Pictures Group Limited - Small Mid Caps Radar

In 2017 Alibaba Pictures recorded revenue growth of 162% y-o-y, reaching Rmb2.4bn, derived from the fast expansion of box office in China. The company also invested in 9 of the top 10 Chinese movies in 2H17-1H18 utilizing the big data and Ali ecosystem.

As China’s box office is expected to grow at a CAGR of c.10% by 2020, we believe the revenue to continue growing, backed by the strong support from Alibaba. Alibaba Pictures will also see a substantial improvement in profitability driven by the operating leverage and lowering costs from upcoming policies.

The company currently trades at 9x FY19 P/S, which is lower than its comparable peer.

Exploration

Alibaba Pictures was established in 2014 through the share acquisition of ChinaVision Media Group Limited (“ChinaVision”) by Ali CV Investment Holding Limited (“Ali CV”) as the controlling shareholder. Ali CV is a wholly-owned subsidiary of Alibaba Group Holding Limited (BABA US) (“Alibaba Group”). The company has started to embed online elements and e-commerce in its original film and television business.

Alibaba Pictures generates revenue mainly from:

Internet-based promotion and distribution (83% of 2017 sales) which charges commission fees for ticket sales from consumers through its online ticket platform “Tao Piao Piao”(淘票票), and from cinemas through its ticket issuance system “Yunzhi”(凤凰云智), together with the online promotion and distribution fees from film producers;

Content production (15% of 2017 sales) which generates box office sales from self-released and co-invested films, together with sales of broadcasting rights for self-produced and co-invested films and drama series;

Integrated development (2% of 2017 sales) which generates GMV sales of IP merchandising products through “Alifish”(阿里鱼) and service fees through financial platform “Yulebao”(娱乐宝).

As at the end of September 2018, Tao Piao Piao, as one of the largest online ticket platforms, covered approximately 90% of cinemas in mainland China. The ticket issuance system Yunzhi is connected to about 3,500 cinemas as well, and ranked the first in the industry. The promotion and distribution business has access to traffic from Taobao and Alipay, covering 500-600m users.

Alibaba pictures has utilized the big data analysis and resources from Ali ecosystem to produce high-quality content. The company has released hot films like Once Upon A Time (三生三世十里桃花) which recorded box office sales of Rmb534m. It also co-invests in top-selling movies (红海行动) with box office sales of Rmb3.7bn, Dying to Survive (我不是药神) with box office sales of Rmb3.1bn, and Hello Mr. Billionaire (西虹市首富) with box office sales of Rmb2.5bn, and ranked among the top 2, top 5 and top 7 respectively at China’s all-time box office receipts.

China’s movie industry has surged rapidly. The box office grew at a CAGR of 26% in 2012-17 and reached Rmb54bn in 2017. The government estimated that by 2020 the box office in China will reach Rmb70bn, representing a 3-year CAGR of c.10%. The access connection with Mobile Taobao (手机淘宝) will help Alibaba Pictures to gain market share with the growing industry.

In October 2017, Fan Luyuan (樊路远), the co-founder of Yu’e Bao (余额宝) joined Alibaba Pictures as thechairman and CEO with major management personnel replaced. Alibaba Group has been increasing the internal support to the company in terms of big data analysis, traffic access and self-owned IP products in recent year since the change of management. On 10 December 2018, the company issued 1bn shares to Alibaba Group, giving the Alibaba Group material control over the company with 50.92% ownership (previously 49%).

In September 2018, the government released information about upcoming film policies including:

“T+0” box office settlement with cinemas;

cancellation of ticket subsidies;

online ticket commission fee to be capped at RMB2 per ticket.

The policies will favour Alibaba Pictures given the liquidity pressure will be brought to its competitors. The cancellation of ticket subsidies will largely lower the company’s marketing costs, which is expected to offset the negative impact of depressed demand due to the ticket price increase and improve profitability.

Alibaba’s revenue grew 108%, 243% and 189% in 2015, 2016 and 2017 respectively. The fast expansion in 2016 brought a loss of Rmb959m. However, excluding the foreign exchange loss of Rmb203m compared with a gain of Rmb428m in 2016, the company recorded a material improvement in operational profitability in 2017. In the first half of FY17/18, the loss further narrowed by 67%, driven by profit realisation of the Internet-based promotion and distribution. The company is now operating with net cash of Rmb2.4bn after taking payables into account, which results in a strong balance sheet position for Alibaba Pictures.

Going forward, we expect revenue to witness rapid growth, continuously driven by growing movie ticket sales, increasing return in content production and the newly established integrated development. We also expect the company’s profitability to improve due to the decrease of ticket subsidies and the low base in 1H18 brought about by one-off cost of historical drama series. Backed by Alibaba Group, the company will gain a strong competitive edge compared to peers.

The stock currently trades at 9x FY19 P/S, which is lower than its comparable peer of 10x. Given the stronger financial position and higher revenue growth, we believe Alibaba Pictures should trade at a premium over its peers.

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